Breaking out is hard to do

Commentary: World’s top economies wait for each other to act

By

AndyXie

BEIJING (Caixin Online) — The global economy is unlikely to accelerate in 2014. The hope that the U.S. economy is reaching escape velocity won’t pan out. Abenomics is likely to fizzle out in 2014. Emerging economies will likely remain in low gear. The chances are that the global economy, as weighted by nominal GDP at current exchange rates, will grow at 2%.

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Globalization, turbo-powered by information technology, has cut short the feedback loop between demand stimulus and supply response. Any growth response to demand stimulus is short-lived, as past five years has demonstrated.

Holding down costs of non-tradeables like housing, health care and education is the key to economic competitiveness and sustainable growth. Any economy that grows on inflating such non-tradeables through stimulus will pay back with low growth later.

Keynes is dead

The year began with much hope that the U.S. economy would be strong enough to carry the global economy forward, just like in the old days. The United States has been gaining momentum with a strong third-quarter growth rate and a string of good employment data. The euphoria was broken by a very poor non-farm payrolls report last week. Some blamed it on cold weather. There may be some truth to this. Nevertheless, the idea that U.S. economic momentum is snowballing is in doubt.

I have argued for many years that this round of globalization has fundamentally changed how an economy works, even for a large one like the United States. While demand is and always has been local, the supply side has become genuinely global. Both manufacturing blue-collar jobs and most white-collar jobs have become global. Today’s information technology allows a multinational company to position research, marketing, finance and managerial jobs anywhere. Hence, when a country stimulates demand, it’s met by supply from anywhere.

The concept of “escape velocity” has gained popularity in the United States. It is a fancy way of saying that the economy can accelerate without stimulus. As the Fed is taking the first step to unwind its quantitative easing, investors and speculators need some psychological support to stay in the game. The term “escape velocity” has emerged in that context.

While the jury is still out, I believe that the U.S. economy is likely to grow at a similar pace in 2014 as in 2013, say, between 2% and 2.5%. The dream of economic momentum snowballing as in the 1990s will remain just a dream.

Caixin Online

Economist Andy Xie

Abenomics fizzles

Japan had two quarters of high growth, so many became convinced that Abenomics was the real deal. The data tailed off toward the usual Japan level of 1% in the third quarter and likely in the fourth quarter, too. Financial markets have become wobbly lately as growth momentum cools off. But the Nikkei Average
NIK, +0.30%
is still at a lofty level. Too many have a vested interest in believing in Abenomics to jump ship now. When bad numbers continue for another two quarters, they will.

The Abe government has been asking Japanese companies to raise salaries to sustain the economic momentum. Even if the salary increase comes through, as people know it was forced and not likely sustainable, why would they spend it?

I’m surprised by how many investors are taken in by Abenomics. Most international funds that invest in Japan have been going all-out to market it to retail investors. This is the main reason that the Nikkei Average has stayed so lofty. I suspect that self-interest is the main driver. Such funds have been withering for a long time. They are latching on to Abenomics for a good time. Even if it doesn’t last, it is better than nothing. Most important, the people who sell Abenomics may not have their own money on the line.

Abenomics is just the same old construction stimulus that the ruling party has been doing for 20 years. The Bank of Japan’s QE isn’t new. It is just bigger than before. Its achievement is to get the yen
USDJPY, -0.20%
down 20% against the dollar, which has happened before. Even the structural-reform talk isn’t new. It happened before and mostly remained talk. So far, structural reform in Abenomics is still talk. This glaring failure has not scared away the investor community. I guess they really don’t want to stop the party and are willing to ignore anything.

Japan has a low unemployment rate. Macro stimulus is the wrong recipe. Japan’s deflation just reflects the yen level. It is not causing a downward spiral. Curing deflation is just devaluing yen. It won’t cure growth weakness.

The Abenomics bubble is likely to burst in 2014. The manifestation is for the Nikkei to come down by 30%. Japan’s fundamental problem is the rigidity of its corporate sector. Unprofitable industries keep going with cheap debt and not caring about shareholders. Its electronics industry is a good example. Globalization is making more of Japan’s industries uncompetitive. The petrochemical industry is next.

Japan’s solution is to shut down uncompetitive industries and shift resources to competitive ones, as Germany has done in the past decade. Characterizing Japan’s problem as a macro one is just misleading.

Shaky ground

High commodity prices led to a frenzy in the sector’s investment. The 2008 crisis prompted a pause. It continued in the following three years. Huge amounts of capital were poured into high-risk projects. The risk to commodity economies is the bursting of this investment bubble, not reduced income due to lower commodity prices per se.

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